What is a Cryptocurrency Wallet?
A cryptocurrency wallet is software or hardware that holds keys, public and private, unique to each different blockchain that allow users to store, send and receive digital currency and to monitor cryptocurrency balances. To buy or use any type of cryptocurrency, a user will first need a cryptocurrency wallet. A good wallet should allow for backups and recovery seed generation along with offering strong security and good functionality. The safest wallets will have open source code.
How Do They Work?
While traditional “pocket” wallets (or accounts) store funds, cryptocurrency wallets don’t actually hold any currency. Instead, wallets hold a copy of the blockchain address where a coin is stored, known as the public key, and the associated encrypted private key used to unlock that address. Both of these keys are needed when accessing cryptocurrency to send or move funds. The public key alone can be used to receive cryptocurrency from others without the private key. The public key can be freely shared without compromising security, but the private key must remain securely protected to prevent others from accessing your funds.
When a user sends digital currency, he or she is essentially moving an amount of cryptocurrency stored in one address to another address on the same blockchain. The private key stored in the wallet is used to unlock and send these funds. The receiving address will have its own unique private key. For some wallet types, once the private key has been used, that key pair should not be used again. Hardware wallets avoid this problem since the private keys are never exposed online during fund transfers.
Note that transactions do not actually move any coins but instead simply represent a change in blockchain address of the original funds with a permanent record of this change created in the blockchain ledger. The record will reflect that funds previously controlled by the sender’s public and private key pair are now stored in a new public address with a unique corresponding private key.
What Type of Cryptocurrency Wallets Are There?
There are a variety of ways to manage and store your digital currency, including software, hardware, and paper. Software wallets are further categorized as desktop, mobile, as well as online or cloud. Wallets that can be accessed online are often referred to as “hot wallets” while “cold storage” refers to wallets without connection to networks. Paper and hardware are the best examples of cold storage.
Desktop: these third party wallets are downloaded and kept on a pc or laptop, and can only be accessed from that device. These wallets offer considerable security in that they can only be accessed from one device, however in the event that your computer is hacked or contains malware or viruses, you run the risk of losing your funds. In addition to third party software, each currency will have an official desktop wallet typically found on their official web site.
Mobile: mobile wallets are downloaded via an app on your mobile device. They offer continuous access to your funds anywhere in the world but typically have less functionality than desktop wallets. They are also at risk should the mobile device become damaged or lost. Recovery seeds must be recorded and stored securely separate from the device to minimize these risks.
Online: online wallets can be accessed from the cloud by any device with internet access. While this feature is useful and obviously convenient, your personal keys are held by a third party and therefore vulnerable to attacks and hacking. Exchange wallets are the best example of an online wallet.
Hardware: a hardware wallet differs from a software wallet in that it is contained on a piece of hardware such as a USB device. Since the private keys are stored in the device and not online, on a computer or in a mobile phone, they offer strong security and ease of use. Cost is the biggest drawback.
Paper: the concept of a paper wallet is quite straightforward. These are physical copies of your public and private keys either written by hand or printed out. Keys must be created using safe practices such as using an offline device to generate and print them. Written key pairs must be carefully checked for errors, as keys are usually complex and lengthy strings of characters.
Are They Secure?
The security of your crypto wallet depends upon a variety of factors, including the type of wallet you use from those listed above as well as the provider of your wallet. Managing your wallet online is inherently more vulnerable than keeping an offline wallet such as hardware or paper wallets.
It is very important to be diligent in the security of your digital currency. This includes backing up your wallet and keeping only the funds for everyday use online. Large amounts of digital currency should be kept somewhere secure and preferably offline in cold storage.
What Else Should I Know?
There are cryptowallets that support only one type of currency, as well as those that have the capacity to support multiple digital currencies. The right wallet type for you will depend upon whether you intend to stick to one type of cryptocurrency, or to try your hand at multiple currencies.
Cryptocurrency wallets aren’t necessarily anonymous; however they aren’t directly tied to a person’s identity. Your personal information (name, address, etc.) won’t be stored on the blockchain but certain data could be traced back to your identity.
Do you already have your wallets set up but wish to learn what you can do with your cryptocurrencies? Be sure to read this article.
What Cryptocurrency Wallets are Currently Available?
Once you’ve decided what type of wallet you want to use, there will be endless options at your disposal. Here’s a quick look at some of the wallets on the market.
Trezor (hardware): Trezor wallet is a sturdy device offering support for bitcoin, bitcoin cash, ethereum, litecoin, dash and zcash. Users typically give the wallet high marks for durability, function and ease of use. Trezor.io
Ledger Nano S (hardware): This hardware wallet offers the security associated with all hardware wallets, however is known for its compact and convenient size and lower price tag compared to Trezor. Supported currencies include bitcoin, ethereum, litecoin, Ripple (XRP) and several other alt coins. You can see the updated list and buy your Ledger Wallet directly on their site.
Jaxx (software): This software wallet is available on iOs, Android, desktop and mobile. The software allows you to back up your wallet, as well as transfer to another device at any time. While it is the preferred wallet for those who are very comfortable with all things tech, it may have a steeper learning curve than other options. (Jaxx.io)
Electrum (software): This fast and easy to use wallet is known for it’s flexibility. Offering integration to a hardware device, storage solutions, and excellent security, this versatile software wallet may meet the needs of most users. (Electrum.org)
MyEtherWallet: This wallet is a great solution for someone who wishes to have the security of a hardware wallet, without the hefty price tag. By using their website (myetherwallet.com) or running the program offline, you generate your wallet and keep track of your keys on your own. These wallets aren’t recommended for someone new to digital currency. In addition to ethereum, the wallet supports ERC-20 tokens. It can be used in conjunction with hardware wallets. Security tip: this site is often the target of phishing sites created with very similar domain names designed to trick you into giving them your wallet information. Always triple check domain addresses before entering information.
Summary
In short, a cryptocurrency wallet is essentially a place to track and manage your digital currency. There is no physical coin being transferred at anytime, but rather a record is created in the blockchain ledger of these transactions. Users may choose between a paper wallet, hardware, or software (which include desktop, mobile, and online wallets). There are varying degrees of security offered within these categories, offline being inherently more secure.
Watch for more detailed coverage of each wallet type coming soon. Register for a free account for our forums at this link to discuss this topic and many more.
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Sources:
https://blockgeeks.com/guides/cryptocurrency-wallet-guide/
https://blockgeeks.com/cryptocurrency-safe/
https://coinclarity.com/wallets-101/
